2. z
On the basis of flexibility the budget may
be classified into two categories namely
Fixed or Static Budget
Flexible Budget
3. z
Fixed or Static Budget
According to ICWA, London- “Fixed Budget is a
budget which is designed to remain unchanged
irrespective of the level of activity actually
attained”.
The budget in which the objectives and targets are
fixed is known as fixed or static budget.
Prepared when? It is prepared after a long
discussion before the beginning of the year.
4. z
In fixed budget preparation the essential
conditions are
Business nature is not seasonal
No effect of external factors on business conditions.
Product demand is certain and fixed
Regular issue of supply orders
Regular supply of inputs
Price stability trend is there
5. z
Characteristics of a Fixed Budget
Targets achievement is a must, as instructions issued
by the management authorities
Fixed aim/objectives/targets of the business
firm/unit.
It is prepared in normal conditions of business.
It assumes that other factors will remain constant in
future.
6. z Merits- i. Time saving
ii. Easy to prepare
iii. Easy to control
iv. Easy to forecast about production and sales.
V .more accurately
Demerits--i. Based on wrong assumption of other things
remaining the same
ii. Change is not possible
iii. In accurate estimates and data
iv. Other factors have great impacts on sales & production
activity
7. z
according to ICWA London, “Flexible budget is a budget
which, by recognizing the difference between fixed,
semi- variable, and variable costs, is designed to change
in relation to the level of activity attained”.
Flexible budget is the budget in which adjustment is
possible according to change in business conditions.
Flexible budget is prepared for various capacity/activity
levels of production i.e. from minimum to maximum
level like- 10%, 20%, 30%, 40%, ………… 100%
Flexible budget
8. z Flexible Budget Characteristics
A Flexible budget consists of a series of budgets prepared in respect of
different levels of activity during a budget period.
It can be changed and adjusted as per the changes in the business
conditions.
Prepared in advance
Prepared for various levels of activity
Its nature is dynamic
Concerned with a particular period of time
Production possible at all levels of productions.
Easy to control unfavorable effects of the changes
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9. z
Flexible Budget: Advantages/Importance/Merits/Benefits
Easy to calculate sales, cost, profits at various levels of production capacity.
Helps in comparison of actual figure with the budget figures.
Help in cost control by finding the variances in actual figures and budget figures. Steps
may be taken to minimum the variance.
In flexible budget, adjustment is very simple according to change in business
conditions.
It is very easy to know the effects of cost factors on business profits.
It helps in determination of production level.
It is prepared to free from the disadvantages of fixed budget.
Know the impact of external environmental factors on the activities of business.
10. z
Demerits
Time consuming, requires more maintenance and
oversight
Limits ability to plan in some areas when budget is
changing
Less Discipline
Enables cheating
11. z
Difference between fixed and fexible buget
Basis for comparison Fixed budget Flexible budget
Meaning A fixed budget is a budget
that remains static
irrespective of the activity
level.
A flexible budget is a budget
that changes as per the
necessity of activity level.
Whats its all about? The fixed budget doesn’t
change as per the
fluctuations of business.
Flexible budget changes as
per the fluctuations of
business.
12. z
Nature A fixed budget is always
static.
A flexible budget is very
dynamic.
Simplicity Pretty simple Quite complex
Ease of preparation It is easy to prepare a fixed
budget.
It is quite tough to prepare a
flexible budget since one
needs to prepare for all
situations.
Consequences The dissonance between the
actual level and the budgeted
level is quite high since there
is no similarity in activity
level.
The dissonance between the
actual level and the budgeted
level is quite low.
13. z
Comparison Comparison is difficult
since the activity levels are
different at the actual level
and budgeted level.
Comparison is quite easy
since the activity levels are
quite similar.
Rigidity Pretty rigid, no fluctuation is
taken into account.
Quite flexible, almost every
fluctuation is taken into
account.
How is it estimated? A fixed budget is mostly
estimated on assumptions
and anticipations.
A flexible budget is prepared
with realistic situations in
mind.
14. z
Conclusion
By comparing the fixed budget and flexible budget, we get
an idea about which one is more useful and more
applicable. Even if a fixed budget is elementary to
prepare, ideally, it’s not an excellent method of budgeting
to be precise; because fixed budgeting doesn’t leave
room for fluctuations.
On the other hand, flexible budgeting is very much
adjustable to the situations of business. As a result, the
business doesn’t need to incur losses. That’s it’s
prudence to use flexible budgeting no matter what scale
of business you’re in
